Question

6. The Shellout Corp. owns a piece of petroleum drilling equipment that costs $100,000 and will be depreciated over 10 years by double declining balance depreciation. There is combined 40% tax rate. Shellout will lease the equipment to others and each year receive $30,000 in rent. At the end of 5 years, the firm will sell the equipment for $35,000. What is the after-tax rate of return Shellout will receive from this equipment investment?

PLEASE DO NOT USE MICROSOFT EXCEL, handwritten or with steps without using a program.

Answer 1

Solution:)

We will be using DDB to calculate the book value at the end of fifth year to calculate the capital gain and will add the lease payments to find the net gain or loss. The same can be found in the below image.

Solution : ou: initial cost of the equipment & 100,000 As per double decliung Balance des a 2 xbook value at beg. Depreciable life Repreciable life = 10 years Dep Remaining BV ay Book Value To, co 2 X 700,000 $20,000 loc, 00 - 20,00 80,000 Year 2 80,000 0,0w = 16 cod 8,000 -1600 = 64,000 Year 3 64000 6 Mov : 12800 64070 -12800 - 57200 Year4 51200 EX 51,200 = 10,240 51200 - 10240 = 40960 Челх 5 Мь 90 о 2 x 40 960 =8192 40960-8192 = 32,768 2) Net Income from leasing for 5 years = 30,000 x 5 = 150,000 (per year sent) of 5th Year = sales price. Bv (at5th year) Capital gain at end - 35000 - 32768 +2232 - Net gain 150,000 + 2232 = 152,232 a Total cost was a 100, oro la pre Tax scheme 152,232- 100,000 52232 100,000 After Tax retion 2.52232 x 407. (1-Tax) Tax 2 40% =52232 x (1.4) Post Tax Retron 8.52232 x. 6 = .3133 - 31.33%